Ethereum is often described as “the foundation for our digital future” (Ethereum.org, 2022) and “the economic foundation for the metaverse” (Bankless, 2021). But what is Ethereum? Is it a platform? And why are people so convicted that Ethereum will be the foundation of our digital lives moving forward?
According to Ethereum Foundation, Ethereum is a “community-built technology behind the cryptocurrency ether (ETH) and thousands of applications you can use today” (Etherum.org, 2022). Ethereum enables a number of different services, such as accessible banking (through lending, borrowing, and saving services), a more private surveillance-free internet, a peer-to-peer network (transactions without intermediaries), and censorship-resistance (no one can stop your payments or prohibit your use of Ethereum services) (Ethereum.org, 2022). Ethereum further enables multiple marketplaces for digital art, coordination tools for countless internet-native and globally dispersed organizations, and over one million financial transactions every day (Ycharts, 2022).
Ethereum allows this range of services by being a programmable blockchain. In 2009, Bitcoin created the first blockchain, which was a non-programmable blockchain enabling peer-to-peer transfer of digital cash. Currently, Ethereum uses Proof of Work (PoW) which is a consensus mechanism invented by Bitcoin that allows distributed consensus, or agreement without centralized governing bodies. PoW is extremely energy intensive and requires network nodes (miners) to all agree on the state of transactions within a blockchain. A more scalable alternative is Proof of Stake (PoS), which requires people to function as network nodes by ‘staking’ their cryptocurrencies and acting as validators. Ethereum is currently transitioning to be a PoS blockchain, which will greatly reduce it’s environmental impact and also “provide scalability that is orders of magnitude greater than what is currently available with Ethereum” (Cryptopedia, 2021).
Ethereum, as the first programmable-blockchain, extends beyond just payments and is a “marketplace of financial services, games and apps that can’t steal your data or censor you” (Ethereum.org, 2022). Vitalik Buterin, the creator of Ethereum, wrote in the 2014 whitepaper, “What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create ‘contracts’ that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.” Ethereum is maintained through a decentralized governance process whereby anyone can process a Ethereum Improvement Proposal (EIP) which is then voted on and approved by members of the Ethereum community (ranging from core developers to network validator to application users). Ethereum exemplifies decentralized governance and community-ownership and operates as a user-owned platform.
Michael Cusumano, Sloan Professor at MIT, defines platforms as “foundation products or technologies that various firms can build upon to create new products and services or transactions” (MITSDM, 2019). He notes that the more innovations and transactions on a platform, the more valuable it becomes due to network effects. Ethereum creates immense value as a platform by providing the infrastructural foundation for innovations and transactions. While many platforms either function as a transaction platform or an innovation platform, Ethereum is unique in that it functions as both, similar to Apple, Google, and Microsoft (MITSDM, 2019). From the transaction perspective, Etherum has a native token (ETH) that is used for peer-to-peer and enterprise transactions. More importantly, however, from the product perspective Ethereum enables decentralized applications to be built and scaled. One of the reasons Ethereum has become widely successful is due to network effects. These networks effects have been created by both Ethereum’s first mover advantage, vibrant and active ecosystem, open-source standards, and interoperability. An important aspect of the Ethereum ecosystem is that digital goods created on Ethereum’s blockchain must remain on Ethereum’s blockchain. For example, an NFT minted on Ethereum’s blockchain must remain on Ethereum’s blockchain unless the underlying code is changed. This further reinforces Ethereum’s network effects as a programmable blockchain. Ethereum is also extremely expandable, and many of the current applications built on Ethereum were inconceivable during Ethereum’s conception 7 years ago.
Over the past few years, Ethereum has experienced immense growth. Below is a graph (adapted from BitInfoCharts, 2022) demonstrating the average number of Ethereum transactions per day since August 2015.
Overall, while Ethereum is often seen publicly for its valuable (and volatile) native token, it is ultimately a decentralized platform that enables thousands of applications and services.
Bankless. (2021, September 21). Defining the Metaverse. https://www.youtube.com/watch?v=EqQiPseP_P8
BitInfoCharts. (2022). Ethereum Transactions Chart. BitInfoCharts. https://bitinfocharts.com/comparison/ethereum-transactions.html
Buterin, V. (2022). Ethereum Whitepaper. Ethereum.Org. https://ethereum.org
Cryptopedia Staff. (2021, December 7). Ethereum 2.0: Ethereum Blockchain Scaling Solution. Gemini. https://www.gemini.com/cryptopedia/ethereum-2-0-proof-of-stake-pos-blockchain-serenity
Ethereum.org. (2022). Home. Ethereum.Org. https://ethereum.org
MITSDM. (2019, October 15). The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power. https://www.youtube.com/watch?v=Yo0ydXtVjGk
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. 9. Ychart. (2022, March 5). Ethereum Transactions Per Day. https://ycharts.com/indicators/ethereum_transactions_per_day